Stefan Szymanskihttp://www.newstatesman.com/writers/stefan_szymanski
enhttp://www.newstatesman.com/economics/economics/2012/08/state-funded-sport-nhs-has-become-something-britain-can-celebrate
<div class="field field-name-field-subheadline field-type-text-long field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even"><p>The National Lottery has fundamentally altered the economics of sport in the UK.</p>
</div></div></div><div class="field field-name-field-node-image field-type-image field-label-hidden view-mode-fulltext"><div class="field-items"><figure class="clearfix field-item even"><a href="/economics/economics/2012/08/state-funded-sport-nhs-has-become-something-britain-can-celebrate"><img typeof="foaf:Image" class="image-style-fullnode-image" src="http://www.newstatesman.com/sites/default/files/styles/fullnode_image/public/3315872.jpg?itok=G8bpLqy9" width="510" height="348" alt="A Danish gymnast vaults over a pommel horse at the 1908 London Olympics." title="A Danish gymnast vaults over a pommel horse at the 1908 London Olympics." /></a></figure></div></div><div class="field field-name-field-nodeimage-title field-type-text field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even">A Danish gymnast vaults over a pommel horse at the 1908 London Olympics. Photograph: Getty Images</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even" property="content:encoded"> <p>As a Brit living in America, I was pleased to see the Olympics succeed in London. But as an economist, I have to say that the financial benefits are limited. We have already seen that the alleged tourism bonanza was a mirage. The boost to GDP is a drop in the bucket – £10bn spread over seven years equals about one-tenth of 1 per cent of GDP per year – and the development benefits to east London are not likely to be significant, given the size of east London’s problem.</p>
<p>Still, one thing we can all agree on is that Team GB’s medal count was impressive, particularly when you consider the progression over the past six Olympics. We won 20 medals (five gold) in 1992, then 15 (with one gold), 28 (11), 30 (9), 47 (19) and now 65 (29). This is a step change in performance, and it is due largely to government intervention initiated by John Major. The Conservative prime minister insisted that the National Lottery, which he created in 1994, should give a significant percentage of its revenues (5.6 per cent back then) to “sporting good causes”.</p>
<h1>
Culture change</h1>
<p>The National Lottery has transformed the administration of British sport. In 1997, the rather lame and well-intentioned Sports Council was bulked up to become UK Sport, a well-funded and ruthless body committed to winning. UK Sport currently distributes roughly £100m a year, about half of it to governing bodies that use the funds to foster “grass-roots” sport. The rest goes to elite athletes for their training programmes. The key point is that the elite athletes and their federations get the support only if they get results – if they fail, their funding is cut off. This brutal approach has been wildly successful; expect delegations to flock from around the world to learn the British secret. Even the Australians are envious.</p>
<p>The mid-1990s will be remembered as the point when British sporting culture changed for ever. In essence, the National Lottery provided the funding to transform British sport from amateurism to professionalism. To understand how peculiar this change is, one has to understand a little sports history.</p>
<p>In the modern world, there have been two models of sport. The first, which emerged in Germany and Scandinavia at the beginning of the 19th century, was primarily focused on preparation for military service. The father of modern gymnastics was a German nationalist, Friedrich Ludwig Jahn, who witnessed the defeat of the Prussian army by Napoleon at the Battle of Jena in 1806 and concluded that this resulted from a lack of fitness. As well as inventing gymnastic equipment such as the horse, he promoted associations for young men to practise gymnastics. Their increased physical prowess contributed to the German revenge over the French at Sedan in 1870. The French soon followed suit and, by 1900, governments across Europe were promoting various sports for their martial virtues (in France, even cycling was endorsed with wartime in mind).</p>
<p>Even after the Second World War, the conscripted armies of Europe and elsewhere placed an emphasis on the benefits of sport. As the welfare state grew in the 20th century, governments came to promote sports for broader social purposes. In the 1700s Jean-Jacques Rousseau argued that the public practice of sport would foster a sense of citizenship and responsibility.</p>
<p>The second model of sport evolved in the Anglo-Saxon world. If military gymnastics is purposeful, then cricket is essentially purposeless. In Britain, sports such football, golf or tennis developed as private pastimes (it is doubtful that the Duke of Wellington ever said the Battle of Waterloo was won on the playing fields of Eton – the attribution was first made by a Frenchman three years after the Iron Duke’s demise). Individuals formed their own clubs, and then voluntarily gathered under governing bodies such as the MCC or the FA.</p>
<p>Even when professionalism came to sports such as football, the involvement of the state was almost completely absent. When protesters argued in the 1960s that the government should prevent the MCC from sending a touring side to play in apartheid South Africa, the government could say with some justification that it had no leverage whatsoever.</p>
<p>The American system evolved as a variant of the British model. Non-Americans tend to notice the professional sporting organisations – Major League Baseball, the National Football League (NFL) and the National Basketball Association (NBA) – but the most important organisation in American sport is the National Collegiate Athletic Association (NCAA). Attendance at college football matches is three times larger than at the NFL, and college basketball attracts twice as many people as the NBA. A large number of athletes, both American and non-American, train in US colleges. Most professional athletes played in college first.</p>
<h1>
Imitation of strife</h1>
<p>The NCAA jealously guards its amateur status, and the college athletic departments have budgets that would put most European football teams to shame (Michigan’s athletic department budget is about the size of Aston Villa’s – and there are dozens like it). All of this is done without the direct intervention of the federal government. Indeed, the suggestion that it might have a role in funding sports is met with horror in the US.</p>
<p>While the American system evolved in imitation of the sporting rivalry between Oxford and Cambridge, that model never developed in the UK. Arguably, British universities’ reliance on state funding after the war made them less interested in developing a sense of sporting loyalty, something that, in turn, generates alumni giving in the US. Equally, it may be that there is just too much sport in Britain to sustain a viable collegiate system.</p>
<p>Whatever the case, Britain has moved decisively in the past 20 years towards the state-funded model, and, judging by the British response to the London Games, people are happy with it. State sport, just like the National Health Service in the opening ceremony, has become something to celebrate.</p>
<p><em>Stefan Szymanski is professor of sports management at the University of Michigan.</em> <em>His research on the evolution of modern sport can be downloaded <a href="http://newstatesman.com/evolutionofsport" target="_blank">here</a></em></p>
<p> </p>
</div></div></div>Wed, 15 Aug 2012 12:31:30 +0000Stefan Szymanski188347 at http://www.newstatesman.comhttp://www.newstatesman.com/sport/2010/06/world-cup-south-africa-events
<div class="field field-name-field-subheadline field-type-text-long field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even"><p>Events such as the World Cup and the Olympics are not the economic juggernauts that their promoters</p>
</div></div></div><div class="field field-name-field-node-image field-type-image field-label-hidden view-mode-fulltext"><div class="field-items"><figure class="clearfix field-item even"><a href="/sport/2010/06/world-cup-south-africa-events"><img typeof="foaf:Image" class="image-style-fullnode-image" src="http://www.newstatesman.com/sites/default/files/styles/fullnode_image/public/articles/2010/20100630_2010_26stadium_w.jpg?itok=SJ_nulMK" width="510" height="348" alt="" /></a></figure></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even" property="content:encoded"> <!-- Generated by XStandard version 2.0.0.0 on 2010-07-05T10:43:15 --><p>There is no doubt that the World Cup has been a joyous party for those lucky enough to attend. There is also no doubt that it has been a bon­anza for Fifa, football's governing body. The commercial income accruing to Fifa will come to about £2.2bn for TV rights, sponsorship and merchandising, while an estimated £800m has been spent on organising the tournament and £700m on local development projects.</p>
<p>Fifa, therefore, generates a tidy profit of £700m, which it either retains to promote its own pet projects or disburses to national football associations: a significant bargaining chip in the hands of its 24-man executive committee. In 2004, the projected cost to the South African taxpayer for hosting the finals was R2.3bn, or £200m (the bid book was lost for years until the <em>Mail and Guardian</em> posted it online in June); the current figure is said to be R33bn (£3bn). Fifa does not pay for the stadiums, but gets to put its brand all over development projects in the host country. And what does South Africa get in return for its investment?</p>
<p>The organisers claim that the event will produce an economic stimulus of R55bn (£4.8bn), generating in excess of 300,000 additional foreign tourists and promoting growth across the economy. Similar claims have been made for previous World Cups and other major sporting events, especially the summer Olympic Games. Politicians seem especially fond of claiming that major events bring significant economic benefits. This case rests on two foundations: first, that the building of stadiums and related infrastructure will boost the construction industry, with knock-on effects into the wider economy; second, that there will be a large influx of foreign visitors.</p>
<h2>Eye candy</h2>
<p>The problem with the first claim is that it is predicated on the assumption that the resources required for construction are lying around idle, waiting for something to do. In reality, modern infrastructure construction requires skilled labour and expensive resources. The question is not whether construction generates income; it is whether this particular form of construction puts resources to best use. It is not difficult to see that the needs of a developing country such as South Africa would be better met by building roads, houses and related infrastructure in the townships rather than building big stadiums. As with the Olympics, facilities for the World Cup are likely to be little used after the event. It's like building a bridge that is going to be used only once.</p>
<p>Take the development of Green Point in Cape Town at a cost of R4.5bn (£400m): the stadium will have hosted just eight games by the end of the tournament. It does offer spectacular views of Table Mountain, but remember just how much this eye candy cost. The original plan was to upgrade the existing stadium in Athlone, at an estimated cost about R1.7bn (£150m). The Athlone redevelopment was attractive because the facility is located in the poor Cape Flats and could have triggered public-sector spending in an underdeveloped area while providing a long-term facility for football fans.</p>
<p>Green Point, by contrast, is located in an affluent area and the mostly white sports fans there are already well provided for in the sports that interest them: rugby and cricket. The local authority had developed the Athlone plan with the South African government. It came into question when Fifa's president, Sepp Blatter, visited the Cape, after an advance delegation realised what a superb TV image a stadium at Green Point would provide. A dubious case was made that Athlone would not provide enough seats, and the semi-final promise was dangled in front of the organising committee. The result: £400m for a few TV shots.</p>
<p>It is questionable whether developing stadiums is a good use of South African government revenue, but the absurdity of the Green Point white elephant seems beyond doubt. Similar questions were raised about the Moses Mabhida Stadium in Durban, which cost R3.1bn (£270m). Local housing activists have bemoaned the waste of resources when so many ordinary people remain without basic facilities. The question of visitor numbers is similarly problematic. It sounds as if the event ought to bring a tourist bonanza, but the records from previous tournaments provide little evidence of any. Take Germany, for example. In June 2006, hotel bookings for overnight stays increased by 1.4 million compared to the previous June - which sounds impressive, until you realise that stays were significantly down on the previous year in May and August 2006, and that 2005 overall was a bad year. The entire 2006 overnight stay figure was only slightly higher than that recorded in 2001. Thus, the World Cup did little to boost German tourism that had stagnated after the 11 September 2001 attacks.</p>
<p>The decision to attend a World Cup hinges on complex factors. Many people who would have visited a location anyway choose to reschedule their trip to coincide with the event. Worse still, others will avoid visiting the country while the event is on. In 2003, there were 14 million visitors to Greece, but in 2004, when it hosted the Olympics, only 13 million. A better comparison with South Africa is the Japan-South Korea World Cup, which was some distance from the main sources of affluent, travelling fans. Japan had an increase in visitor arrivals in June 2002 of 37,646 over the previous year. South Korea suffered a decline of 56,864. South Africa expected a tourist uplift from Europe and the US; experience suggests disappointment.</p>
<p>In 2004, when South Africa was awarded the World Cup, there was talk of visitor numbers as high as 600,000 from people connected to the bid. By last year, Grant Thornton, as consultant to the organising committee, was still anticipating 483,000 visitors, but down­graded its forecast to 373,000 in the spring. Even this number sounds optimistic; hotels in Durban, Cape Town and elsewhere have been reporting occupancy rates in the region of 10-30 per cent, rather than the expected 65-75 per cent. Journalists have been talking about how quiet it is outside the stadiums. Demand for tickets within South Africa and from the rest of Africa has been particularly disappointing and some of the group matches were played in half-full stadiums, as if to emphasise what a waste of money much of the investment has been.</p>
<p>To put it in perspective, visitor numbers from outside Africa totalled 331,000 in June and July last year, while visitors from other African nations exceeded 1.2 million. So it looks as if numbers of tourists to South Africa will be little different from previous years. This is a financial nightmare for South African commerce, including large numbers of small businesses that invested in facilities to meet a much higher level of demand.Yet none of this should come as much of a surprise: if the South Africans had asked for an objective view backed up by data five years ago, they could easily have got it.</p>
<p>So, why are such inflated and misleading claims presented by governments and organisers? The answer is that Fifa and the International Olympic Committee (IOC) are monopolists selling the rights to the most attractive sports events on the planet and, like any good monopolist, they are not prepared to give their property away cheaply. That is why they organise bidding contests among potential host nations. Setting political rhetoric aside, what wins you the bid is the promise to lay on lavish games to the greater glory of Fifa and the IOC, largely at the public expense. These events could be self-funding, but then they would not be so lavish. Fifa and the IOC demand a government guarantee to underwrite the staggering cost. To justify this extravagance, politicians cover themselves by claiming that there is an economic benefit - a quite breathtaking refusal to face the facts.</p>
<h2>Voodoo economics</h2>
<p>In many cases, one might say that this does not really matter. There is good evidence that the public at large derives a significant feel-good factor from hosting major events and so is quite willing to subsidise them. Wealthy nations such as Germany and the UK can afford (more or less) to cover the cost if that is what people want. And, in the light of the banking bailouts, the subsidies no longer look so huge. Moreover, there is reason to believe that the public is not fooled by the organisers' voodoo economics. When it was announced in 2007 that the cost of the 2012 Olympic Games in London would be closer to £9bn than the original estimate of £2.4bn, few batted an eyelid.</p>
<p>But with South Africa, the issue is more serious. The UK government spends about £80bn annually on education, whereas South Africa spends about £12bn. The UK is spending a sum equal to just over 10 per cent of its annual education budget on London 2012, South Africa about 25 per cent to host the 2010 World Cup. Scarce resources are being diverted from activities that have much greater value added.</p>
<p>This is just not good enough. Historically, most major sports events have been awarded to wealthy nations that can afford to pay for them. Awarding the World Cup to a developing nation is an important step forward, but this achievement should not be bought by using essential resources to provide VIPs with freebies. There is no doubt that these events could be less lavish and remain equally entertaining. Most of us watch the World Cup on TV - we will be watching what is happening on the grass, and not from the blimp, or even the terraces.</p>
<p>There are many ways in which a more equitable World Cup could be organised, but most reforms require a more open and democratised governance at the top. Both Fifa and the IOC could choose to award their prestigious prizes not on the basis of extravagant public spending, but on sporting merit. For example, the nation that did the most to promote participation in sport could be awarded the right to host these events. Nor need they discriminate against the poor, as the key measure would be growth, not the base level at which countries start. However, such reforms require a commitment to pursuing purely sporting objectives, rather than the current system of rampant commercialism for the good of organisations such as Fifa. Football is meant to be the beautiful game, not the bankrupt game.</p>
<p><em>Stefan Szymanski is professor of economics at Cass Business School and co-author of “Why England Lose" (HarperSport, £7.99)</em></p>
</div></div></div>Mon, 05 Jul 2010 08:33:33 +0000Stefan Szymanski174634 at http://www.newstatesman.comhttp://www.newstatesman.com/economy/2010/03/football-banking-clubs-essay
<div class="field field-name-field-subheadline field-type-text-long field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even"><p>The parallels between football and banking are striking: both have been under-regulated, loaded with</p>
</div></div></div><div class="field field-name-field-node-image field-type-image field-label-hidden view-mode-fulltext"><div class="field-items"><figure class="clearfix field-item even"><a href="/economy/2010/03/football-banking-clubs-essay"><img typeof="foaf:Image" class="image-style-fullnode-image" src="http://www.newstatesman.com/sites/default/files/styles/fullnode_image/public/articles/2010/20100310_2010_11football_w.jpg?itok=H-WYtMHz" width="510" height="348" alt="" /></a></figure></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-fulltext"><div class="field-items"><div class="field-item even" property="content:encoded"> <!-- Generated by XStandard version 2.0.0.0 on 2010-03-17T15:46:29 --><p>Extravagant salaries and lifestyles, decision-making driven by short-term gain rather than long-term success, weak regulation and managers who think they can risk everything because the business is too big too fail. We could be talking about the banking industry, but the description works equally well for football.</p>
<p>For HBOS read Manchester United; for Northern Rock read Crystal Palace; and for Lehman Brothers read Real Madrid, Portsmouth - now in administration - or any one of the host of small and medium-sized clubs that could have gone the same way.</p>
<p>The banking crisis triggered a re-evaluation of the merits of capitalism and detailed planning is now in train to construct a regulatory system so that never again will bankers bring the global trade system to the brink of total collapse. But it is unlikely that the "new regulation" will stop there - risk control is the new zeitgeist. Much the same may be about to happen in the football world.</p>
<p>Compared to banking, football is a trivial activity. Banking is the circulatory system of the body economic, the veins and arteries that carry the essential nutrients of growth and development. Without banks there is no credit; without credit there is no investment; without investment there is no production, no capacity to meet the needs of today or the aspirations of the future. Whether it's the school cake sale or a new electricity-generating plant, nothing gets done without using up resources first in the hope of getting something back later (preferably more than you started with). The banks are just the organisations established to vet potential projects (more power stations than cakes) and lend out resources that depositors don't need right now (at a price). It may not be God's work, but it is the future of our children. For example, without the banking industry there will be no possibility of building better flood defences or a low-carbon future.</p>
<p>Our children's future does not depend on football, but the outcome of football matches weighs more heavily in most people's lives than the closing prices of the FTSE. There is a general feeling among football fans (which now­adays means most of us) that we are entitled to have a say in how football is run. When Americans buy "our" clubs, or the national team sinks to another defeat, we feel involved. It is easy to forget, when pundits clamour for the government to "do something" about the lax management of the FA, that this organisation is not part of the state, but a private institution, established by footballers as a form of self-government. Yet, we feel like owners and expect those who do control the management of the game to act like trustees, not landlords.</p>
<p>At the moment there is concern that football might go into some kind of financial meltdown. Any number of clubs in the lower divisions are close to slipping into administration, nagging concerns persist about the debt exposure of giants such as Liverpool and Manchester United, and the extravagant spending of Real Madrid last summer (underwritten by banks) masks the real position of almost all Spanish clubs: on the verge of insolvency.</p>
<p>The banking crisis can be attributed to three factors: a failure of theory, a failure of management and a failure of morality. The theoretical failure was that models used to calculate the minimum level of prudential reserves that banks needed to cover the risks they were taking were unable to cope with a systemic crisis. On the management side, those who nominally ran the banks were not being equipped with the knowledge or training to understand how these new financial instruments worked, and so were apparently unaware of the scale of the risk their employees were running. Light-touch regulators also failed to grasp the extent of the risks and the potential crisis contained within the trading system. All this seems extremely surprising to an outsider, but then banking got very complicated very quickly. Banks looked for ways to increase their profits by evading controls, and it was easier to nod your head as if you understood, especially when profits were rising.</p>
<p>The detail is complex but the morality tale is less so. In the eyes of ordinary citizens the banking crisis is about greed. Bankers believed that greed was good, and their greed caused them to disregard the damage they did to others. Public anger is aimed not at the institutions themselves, but at the people who run them, the wages and bonuses they have been paid. Morality is fashionable again, a change that seems to catch the bankers unaware. Morality is always a comfort in a crisis: "My life has been ruined not because of anything I did, but because of bad people around me." But did banking attract bad people or were potentially good people turned bad by banking? If banking attracts the bad, then should we carry out moral examinations to prevent the advancement of the wicked? Does anyone know how to spot a wicked person before they have committed their wickedness?</p>
<p>The "good people turned bad by banking" theory is more manageable. In this view, bankers took excessive risks because they had contracts that offered large payouts if profits grew rapidly, and only limited penalties in the face of large losses. The largest loss you can face as an employee is losing your job, but if this risk were to be set against the potential to earn millions within the space of a few years many of us might be tempted.<br />The downside was limited at zero for the employee, but the downside for the banking system involved billions of dollars of losses, and the downside for the economy was a collapse in output and the loss of livelihood for millions of families. This problem is known as "moral hazard" - when decision-makers are not liable for the consequences of their actions they tend to take actions that suit their selfish interests. Banking is not alone in being afflicted by this problem (co-ordinating global action on climate change is another good example), but it is particularly susceptible because of systemic risk.</p>
<p>So is there a kind of employment contract that might make bankers into better people? To write an ideal contract, you have first to know something about human beings and their motivations. Bankers' contracts were based on the premise that what people want is more money, but there are reasons to wonder if this is quite right. Economists have always thought that what people want is happiness (using the word "utility" for the concept of happiness makes the issue sound unnecessarily technical), but this only raised the question of what it is that makes people happy. Many decades of large-scale world surveys have indicated a striking feature about our happiness: we seem to be happiest when we are at the top of the income scale, but on average we don't seem to get much happier over time even though incomes have been rising. In other words, while money might not buy you happiness, happier people tend to have more money than the rest of us. This finding, known as the Easterlin paradox, suggests that relative position rather than absolute standing is the key motivator of human action - whether in banking or any other aspect of human endeavour.</p>
<p>Now think again about the problem in football. Florentino Pérez, the recently re-elected president of Real Madrid, went out and spent more than £200m during the summer of 2009 on acquiring players such as Ronaldo and Kaká, with little prospect that these acquisitions would generate a financial return large enough to cover the debts incurred. Why was he willing to risk the financial stability of the club in this way? First, because its arch-rival Barcelona had just won the Champions League, and second because Real Madrid is far too important to be allowed to fail, and so Pérez will not be liable for the consequences of his decisions. Pérez is driven by status and by an incentive structure that rewards risk-taking. Nor is he alone in the football world. Most of the Spanish league clubs have debts they are unlikely to be able to repay without some financial restructuring, and the same is true anywhere you look in Europe.</p>
<p>In England there have been 50 or more cases of club insolvency since 1991, usually resulting in a restructuring that involves writing off debts and tax liabilities, often leaving the same management in place. It is not that they are not good at selling - income has risen sharply in the past 20 years. Ticket prices have increased tenfold. For the Premier League, the tide of television money has risen inexorably. And the clubs have learned from the Americans how to exploit their merchandising potential.</p>
<p>But as fast as the money comes in, it has been spent on players, in attempts to build a better team. This is not illogical, viewed by a club on its own - more expensive players tend to play better and win more titles. The problem is that collectively it cannot work, given that only one team can win the title each season. In their anxiety to be the one, clubs have extended themselves to the limit, and frequently just a little bit further. If there were no incentive to achieve the status of champion, this would not happen. As a result, the leagues now penalise teams that go into administration by hitting them where it hurts, docking points and so making it less likely that they will become the champion.</p>
<p>Much the same is true in banking. The bankers at the world No 2 bank want to do a deal that will raise them above No 1; No 3 is thinking about the same thing in relation to No 2; while No 10 is contemplating leaping over Nos 9 to 6 and getting into the top five. Was it the money or the status that drove the bankers?</p>
<p>Perhaps there is no distinction. In banking and football, competition is about competition to be the champion, which in banking usually means being the biggest. Is such competition necessarily damaging? It should be remembered that during all the financial disasters in football, attendance has continued to grow (despite ticket price increases) and the appeal of the Premier League is now greater than it has ever been.</p>
<p>Indeed, the Football League Championship (the old Second Division) has risen to become the fourth most popular league in Europe (after the English Premier League, Germany's Bundesliga and Spain's La Liga, ahead of Italy's Serie A), unimaginable in the 1980s and thanks largely to the English brand of football capitalism.</p>
<p>It is tempting to make the same point about British banking, which, together with financial services, has been one of the main drivers of UK growth over the past two decades. Between 1991 and 2008 the UK economy grew by 57 per cent. Since 1830 there has not been any other <br />17-year period when the economy grew as fast: we have just lived through the biggest boom in British economic history. Even though the economy has contracted by roughly 7 per cent over the past year, this still makes the entire period look very successful. Some people say they don't want to return to economic growth, but it was growth-generated tax income that enabled our government to increase spending hugely on public services - spending now at risk precisely because the economy is shrinking.</p>
<p>There are those who see the future as one of draconian regulation. In the football world France and Germany already claim to have regulatory schemes, whereby league officials vet the spending plans of the clubs at the beginning of the season, approve only those player purchases that are financially sound, and require all debts to be settled in cash at the end of the season. For good measure, they make sure that foreign owners cannot take over any of their clubs. As a result, their leagues fail to compete in international competition even though they produce plenty of good players.</p>
<p>Such restraints have not ended the compe­tition for status, which frequently requires the clubs to conceal their real financial position from the regulators. Allegations of corruption are common. In several cases clubs have clearly broken the rules and there is little evidence that French or German fans benefit from these regulations. A German team has not reached the semi-finals of the Champions League since 2002, a disaster for the largest football nation in Europe. Meanwhile, although many clubs have gone into administration, all of them have survived in some form. In 1923 there were 88 clubs in the Football League and today 85 of them still exist, with 75 still in the top four divisions. Despite frequent financial meltdowns, football clubs are remarkably stable. Owners come and go but supporter communities endure.</p>
<p>In the case of England there is one reform that would help. The abolition of the football "supercreditor" rule would force the leagues to reconsider their own rules. Uniquely in the business world, football creditors (clubs owed money for transfer fees or players owed wages) rank above even the taxman in an insolvency. The league authorities claim this rule is necessary to prevent a systemic crisis, whereby the failure of one club causes others to fail, but in reality it just amplifies the moral hazard problem.</p>
<p>If it were abolished, as the Inland Revenue has long demanded and the All Party Parliamentary Football Group recommended to the Commons in 2004, the leagues would have a strong incentive to impose tighter regulations of their own. It would also prevent the obscene consequence that a player on £1m a year gets payment in full while the St John Ambulance does not get paid the £5,000 expenses incurred to provide first aid at football grounds.</p>
<p>Competition for status is unlikely to come to an end because of any regulation, but it might be diverted into different channels. In the banking sector, it is reasonable enough to say that light-touch regulation did not work; this is not the same as saying that a heavier-handed approach will. Innovative ways to make money will move offshore if they are not permitted at home.</p>
<p>Given the greater significance of systemic risk in banking compared to football, leaving the sector to its own devices is not an option. But legislators and regulators need to think carefully about how new rules will affect the competition for status. We need banks and bankers, and we need legitimate channels through which they can succeed, and their success can serve all our interests.</p>
<p>Tighter controls in football would divert competition for status into competition to influence the regulator and to obtain favours, exactly the sort of problems that lay behind the Calciopoli scandal in Italy. We want owners of teams in football to compete for status in football, because that drives the quest for better teams and more success.</p>
<p>As for finances, we are much better placed to manage the consequences of failure in football than we are in banking.</p>
<p><em>Stefan Szymanski is professor of economics at Cass Business School. His latest book, "Why England Lose" (written with Simon Kuper), is published by HarperSport (£15.99)</em></p>
</div></div></div>Mon, 15 Mar 2010 08:13:38 +0000Stefan Szymanski169523 at http://www.newstatesman.com